ECB Says Bank Crisis Plans Risk Harming Deposit Guarantees

July 10 (Bloomberg) -- The European Central Bank said the
European Commission’s plans to handle the failure of large
lenders may threaten its independence and could damage
confidence in national guarantee programs for bank deposits.

ECB Vice President Vitor Constancio made the remarks during
a debate on a draft law with finance ministers in Brussels
today. Some ministers also raised concerns about the proposal,
which Michel Barnier, the European Union’s financial services
chief, has described as a “cornerstone” of the bloc’s efforts
to build a so-called banking union.

There is a “potential difficulty” with how Barnier’s
proposal would interact with deposit-guarantee programs,
Constancio said. It’s necessary to avoid “any doubts of the
citizens” on the capacity of such plans to honor their
commitments, he said.

Regulators have called for enhanced powers to handle bank
failures as part of measures to take taxpayers off the hook for
bailouts. The commission’s proposal, made on June 6, would
require nations to set up bank-financed funds to support crisis-hit lenders. These funds would be allowed to borrow from central
banks in an emergency and would have to lend to each other as a
last resort. Nations would have the option to merge these
reserves with their deposit-guarantee programs.

‘Resolution Fund’

Governments and lawmakers in the European Parliament must
approve Barnier’s draft law before it can take effect.

The ECB opposes plans to allow the funds to tap central
banks for loans, Constancio said, adding that this couldn’t
apply in the euro area because the ECB cannot provide such
support. The measure “goes against the spirit of the treaty in
what regards the independence of central banks from financing
tasks that belong to the governments,” he said.

Constancio said the ECB supports the creation of a
“European resolution fund” to handle crisis-hit banks.

Ministers have signaled concern that the bank-financed
funds would prove insufficient and that the proposals would
concentrate power with supervisors in countries where major
lenders are headquartered at the expense of authorities in
nations that host subsidiaries and branches.

The proposed funding arrangements “will not be enough,”
said Luc Frieden, Luxembourg’s finance minister. “There will
always be indirect costs for government.”

Similar problems would confront a single European fund,
Frieden told reporters after the meeting.

‘Enormous Amount’

“The idea that all banks could be saved with this fund is
a good idea, but it’s also a bit naive in the sense that there
has to be an enormous amount of money in this pot so that this
pot, this resolution fund, can later save all banks in Europe,”
Frieden said. The refinancing needs of some Spanish banks has
shown “what enormous sums of money are needed,” he said.

Mario Monti, Italy prime minister and finance minister,
said the commission plans are “not ambitious enough” because
they build on a “decentralized,” national approach.

Policy makers including EU President Herman Van Rompuy have
called for nations in the euro region to create a banking union
with a single supervisor for lenders and common financial
backstops for dealing with crisis-hit banks.

Single Supervisor

Euro-area leaders on June 29 endorsed the creation up of a
single supervisor, involving the ECB. They said that once this
is established, the euro area’s permanent bailout fund, the
European Stability Mechanism, could recapitalize banks directly.

Barnier should outline how to make his proposal from June 6
“more consistent with the more ambitious direction put forward
in the Van Rompuy report,” Monti said.

Barnier said after today’s meeting that he would make a
proposal in September to establish a single banking supervisor
that would serve as a vanguard for further measures to build a
banking union. The commission’s subsequent steps may include
proposing amendments to draft laws on deposit guarantees and
bank-capital requirements, as well as to the June 6 proposal for
crisis resolution, he said.

The banking-union measures would benefit all 27 EU nations
and are “essential” for the 17 countries that use the euro,
Barnier said. Still, it will be possible for some nations to opt
out, leading to “different degrees of engagement.”

The commission plan for a single supervisor will hand
powers to the ECB while preserving the role of the European
Banking Authority, Barnier said. The EBA coordinates the work of
regulators in the EU, and has some power to settle disputes
between them.

The single supervisor should have the power to directly
regulate all lenders in countries that participate in the
banking union, while delegating some tasks to the national
level, Barnier said. It should be in place by the end of 2012.